Friday, February 19, 2010

Things Are Going To Start Happening Now

This happened last week (from the LA Times):
California insurance regulators asked Anthem Blue Cross to delay controversial rate increases of as much as 39% for individual policies, hikes that have triggered widespread criticism from subscribers and brokers -- and now from the federal government.
In a rare step, the Obama administration called on California's largest for-profit insurer to justify its rate hikes, saying the increases were alarming at a time when subscribers face skyrocketing healthcare costs.

Anthem defended themselves (via Truthout):
Brian Sassi, an Anthem Blue Cross’ President and Chief Executive Officer Consumer Business Unit, on Rate Adjustments in California, said the company filed first filed notice of the rate increase with state regulators last November.
"They are actuarially sound and in full compliance with all requirements in the law,” Sassi said in a prepared statement issued Saturday. "The rate adjustments have been reviewed by an independent expert. Our decision to agree to postpone the rate adjustment does not change the underlying issue.
But California Insurance Commissioner Steve Poizner disagreed.
...Poizner said "medical cost inflation in California is in the 10 to 15 percent range, so I have a healthy skepticism how they can [justify a 39 percent" rate hike.
So what gives? If costs in California are increasing by only (only!) 10-15%, why does Anthem need to raise rates by 39%?

Here's why. Health insurance doesn't work unless most (ideally, all) people have it.

What makes insurance affordable? Healthy people whose premiums go towards paying for sick people. This makes sense if you think about it for a moment. If the only people who had health insurance were people who had annual health care costs of $100,000, how much would their annual premiums be? Answer:$130,000. (The extra $30k represents the overhead and profits that health insurance companies require.)

This is obviously unsustainable. No one would pay $130k for $100k worth of health care, even if they could afford it. But some of those expensive sick people still have health insurance. How is that possible?

It's possible because there are a lot more healthy, cheap people than sick, expensive people, and while the sick, expensive people get more health care than they pay for, the healthy, cheap people get less.

So why would healthy people agree to pay for more care than they get so that sick people can get more care than they pay for?

Well, normally, they wouldn't. But in the United States, people have traditionally gotten their health insurance through their employer. And this health insurance, even though it's income, is not taxed like income. In fact, it's not taxed at all. This amounts to a gift from the government to every single person who has employer health care. In other words, the government is giving healthy people some extra money to make up for the fact that they are paying more for more health care than they are getting. This system worked for a while, because there were plenty of people in the system, and so the risk was spread across a large group of people.

So what went wrong? Well, employers are covering less and less people every year. (High unemployment, fewer high-paying jobs, and rising overall health care costs associated with fee-for-service are among the reasons.)

This means that more and more people are put in the individual market. And in the individual market, healthy, cheap people don't get that extra money from the government to compensate for the fact that they are paying for more health care than they need. So what do they do? They cancel their coverage. And every time a healthy, cheap person cancels a policy, premiums go up for everyone else, because that group just got a little less healthy on average. And every time premiums go up, more and more relatively healthy people will cancel their policies, and the vicious cycle continues.

Now, this doesn't come as a surprise to health care experts; it's a well known fact that what we think of as a health insurance free market doesn't work unless everyone is required to have coverage. The health insurance tax deduction is just one way to make sure people don't cancel their policies. But when costs rise, and unemployment rises, and employers stop offering coverage, people start dropping out anyway, and unless there is some law requiring them to stay covered, the whole system collapses. And so what is happening right now is not something that might cause the system to collapse; it's actually the system collapsing right before our eyes. And as the system enters its death spiral, the speed of collapse will increase exponentially, because the system has entered a positive feedback loop.

So what's actually happening in California is not that everyone's health care costs are increasing 39%. The overall increase, as Poizner says, is around 10-15%, (still unsustainable.)

What's happening is that Anthem's healthy customers are canceling their coverage. The expensive, sick people, of course, can't cancel their coverage, because they'll never get coverage again. The result is predictable: their premiums are going to go up far faster than average health care costs. Eventually, their premiums will be so high that there won't be any customers left at all.

Unfortunately, this doesn't mean that there won't be any sick people left. It just means that they won't be getting health care.

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